I got the following problem. found fixed cost per bushel as .625 cents (125,000/200,000). So it is costing $5.62(5+.62) to produce one bushel. It is loss to sell at $5.35. Why is A not correct? -------------------------------------------------------- John Klement is a soybean farmer who harvests 125,000 bushels of soybeans annually. Klement’s fixed costs are $200,000 and his variable costs are $5 per bushel. Soybeans are currently priced at $5.35 per bushel. Based on his estimates, Klement sees soybean prices being relatively stable for the next two years, then increasing to $7.00 per bushel due to increased demand from Japan. What action should Klement take? Klement should: A) shut down for two years and then restart his business. B) continue operating his business as usual. C) cut his production by 50% for the next two years and then resume full production. D) shut down his business permanently. Your answer: A was incorrect. The correct answer was B) continue operating his business as usual. Since Klement is selling soybeans, a common commodity, he is a price taker and therefore can not adjust the price. He should continue operating his business as normal as he is currently covering variable costs and part of fixed costs. In two years from now, he will be able to cover both fixed and variable costs and be able to make a substantial profit.
In the short run, you can run the business as long as you meet the variable cost which is $5 in this problem. It is said that he will be making profit after 2 years.
If he doesn’t produce his loss is 200,000. If he produces, his loss for two years = (5.62-5.35)*12500=3375 So he is better continuing production for 2 years.
chinni234 Wrote: ------------------------------------------------------- > I got the following problem. found fixed cost per > bushel as .625 cents (125,000/200,000). So it is > costing $5.62(5+.62) to produce one bushel. It is > loss to sell at $5.35. Why is A not correct? > -------------------------------------------------- > ------ The fixed cost per bushel should be 200,000/125,000= 1.6 Although it does not impact the inference here but just in case.
Thanks for replies. Now I understood very well.
And since soybeans are trading at about double that price now everything would be good…